Growth through acquisition is an extremely appealing and exciting opportunity for most business owners and managers. Identifying a promising acquisition target that offers new potential and return on investment is tantalizing.
“Unfortunately, too often I see this excitement overshadow some of the valuable information that needs to be obtained and evaluated when making decisions on potential acquisitions, particularly when it comes to inexperienced buyers,” says Paul Woznicki, CPA, associate director in transaction advisory services at SS&G Financial Services, Inc.
“While there is some validity in describing due diligence as ‘the pain before the gain,’ the fact is, sometimes not enough pain results in not enough gain.”
Smart Business spoke with Woznicki about what information a potential buyer needs to consider when deciding whether an acquisition is right for his or her company.
When considering an acquisition, what is the first thing a potential buyer needs to do?
A potential buyer needs to clearly define and understand the key value items that are central to the acquisition. In essence, what is it about the target entity that you value? A buyer needs to know where the value lies in what he or she is considering purchasing. Is it market share, key personnel, technology, a cash flow, a product line? Prior to investing time and money into the due diligence process, the buyer must compare the perceived value of these items to the preliminary sale price offered. Once those items are clearly defined and the sale price is in line with the buyer’s value judgments, the buyer’s due diligence process can then be tailored to most effectively validate those key value items.
When performing due diligence, what does a potential buyer need to evaluate?
Due diligence is a process of verification, analytics, discussions and investigative inquiry. Some of the key information typically reviewed includes:
- Historical financial information. This gives the buyer a comprehensive view into how the company has performed in recent years. This often includes verifying certain key aspects of historical information to establish a workable basis for projecting the future financial performance of the company.
- Projected financial information. The assumptions used to project financial information are analyzed for reasonableness and obtainability.
- Contracts, agreements and other documents. Depending on the structure of the transaction, various documents (including employment contracts, debt and lease agreements, commitments, corporate documents, patents, tax returns) need to be reviewed to determine whether any possess obstacles to a successful completion of the transaction.
- Industry markets, trends and information. Future opportunities with any company depend largely on the owners’ understanding of their markets, competitors, industry issues, trends and other global factors. Analyze the corporate environment and personalities of key employees, determine the likelihood of successful synergies and identify operational opportunities.